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DFW’s Strengths Keep Investors’ Dollars Flowing In

The top minds in the capital investment field in DFW talk about the capital markets in recent years, and what the future will hold for North Texas.

April 18, 2017 - 11:10am
Lance Murray

LANCE MURRAY: We’ll start by asking each panelist to give us a recap of the real estate investment picture in 2016. Were things better, were they worse, or were they about what you expected?

TONY DONA: 2016, in our view, was more of the same. It was a better time to be a seller than a buyer. The markets remained extremely liquid, and Dallas was no exception in that regard. To the extent there was a difference year over year, it felt like there was [a smaller] pool of buyers. On the buy side, debt maybe wasn’t as available as it was in 2015, but it was still adequate.

MAUREEN KELLY COOPER: For sales of properties, it was a record year, and the price was perfect, which goes to the fact that there’s a lot of competition for buyers out there. ... We had some of the largest transactions — with State Farm and the Verizon transactions, and then also Uptown prices — and at first look, they were higher historically.

JAMES DUNN: It was pretty much as expected ... stable environment, good fundamentals, liquidity in the environment. The why and for of the region — we’ve had a lot of corporate relocations. I think that’s due to our limited government by design, and limited regulations. State legislators [meet every other year]. They can’t mess it up that badly. So, that’s good. That’s attracted a lot of businesses and a lot of population growth. We’ve had huge job growth. Since the 1990s, we’ve nearly doubled the nation’s growth rate. That’s all because of a pro-business, can-do attitude, low taxes, and affordable living. All those positive things have underlined what is happening in the region, which is really positive.

TIM JORDAN: While we’re hitting pricing peaks, we’re also hitting rent peaks. Rent has come up dramatically, and we’ve recovered nicely. DFW recovered [well] on the job side, and that continues to drive rents in all product types. You see it in office, multifamily, and industrial properties. It’s been very strong for those products.

PAUL ROWSEY: Activity was a little better than I expected. That reflected as more of a bear than a bull. Relocations have had a big effect. Obviously, the business environment here is very good, and there’s been a lot of population growth.

Quick follow-up with Tony. You mentioned that there might have been less capital available in 2016 than in 2015. Is there an overriding reason?

DONA: Banks pulled their horns in a little bit on development debt, and for certain value-add assets — maybe debt was a little less available. But there’s still plenty of debt. In our world, 2015 felt perfect when you were a borrower, whereas 2016 was a little less perfect.

Let’s talk about the new administration in Washington. Perhaps there’s going to be a new regulatory environment for the financial markets — for investing in general. Give us an idea about how that could affect the availability of capital in North Texas.

JORDAN: Again, this is a national picture, not merely a regional picture. The regulation really affected the banks, and it specifically affected construction financing available at the banks. If there’s any relief on regulation on the regulatory side for the banking industry, it probably will show up most prominently on the bank side of the market and then for construction, too.

MURRAY: So you think construction lending could free up even more?

JORDAN: It could free up, but it’s been fairly constricted over the last couple years.

DUNN: On that note, it’s actually been good for our business. We’re a nonbank financial company. We’ve seen a lot of things come our [region’s] way: Look at the $500 million of construction primarily. We’ve seen some of that come our way, which has been very good for us. It’s good because it tempers the possible oversupply in the DFW area. It causes people to leverage less, and we’re seeing banking capital at low leverage points. You see this new market forming between the 50, 55 percent leverage up, and then management or preferred equity coming in to fill the gap. We’ve seen a lot of supply in Houston just coming out of the ground now and a pretty soft market. We’re thinking it’s positive overall. The Trump administration will a lot of choices in terms of policies — the expectation and the reality may be different. ... That could cause a little bit of a bubble. Small business sentiment spiked in January, and that’s very bullish for job growth, and we haven’t seen that since 2004. It’s really strong. It went from the mid 90s to 105 or 106. It’s really bullish, in terms of what’s potentially coming into Washington. Only time will tell.

COOPER: The reason I think it’s high on the stock market, too, is that people are thinking that it will be good for business — maybe some relaxing of the Dodd Frank Act.

DONA: For Dallas specifically, and maybe stepping away from regulation, if the administration is successful in increasing defense spending, that’s going to be a net positive for Dallas-Fort Worth. If Dallas-Fort Worth would have a concern with the new administration, [it would be] what happens on trade and immigration. Given Dallas’ diversified business activity, that could be a negative.

ROWSEY: There’s going to be some modifications to Dodd Frank. In this administration, there’s going to be a move away from globalization in the regulation of financial markets. We could move away from Basic Three. That should increase the flows of capital and the availability of capital. Offsetting that, with the potential of a stronger dollar, it could retard foreign investment and the available capital from foreign sources.

COOPER: On the global road, we would definitely have gotten some uncertainty with Asia and Europe regarding what’s happening in the United States — the viewpoint internationally. That might deter some investments in the United States on foreign capital.

Would that hit DFW particularly hard? Is there enough foreign investment here?

COOPER: I think foreign investment is around 10 percent in Dallas. So it’s not going to be a major impact right now.

In the past couple of years, multifamily has been very strong in DFW. Is it still, and what sectors do you think will surprise you in 2017?

ROWSEY: Multifamily is still fairly strong in the region, but rent growth is moderate. You have seen some concessions, a preemptive market. There’s some concern about supply, especially at the high end of the market. Overall, things seem to be fairly steady. Absorption continues to be good with some rent growth. That’s all positive. In terms of the sectors that are going to be positive in the coming year, small industrial — “the last mile” — is going to continue to be a favored asset class.

JORDAN: The multifamily side can’t get much better than what it is right now. We’ve seen between 95 to 96 percent occupancy across sectors A, B, and C. You have over 25 percent growth in rents in the As, Bs and Cs over the last four years. It’s been very dynamic. The opportunity for redevelopment will continue. Older product that needs some tender loving care and rehab, will be a move-up market. Are people getting into a better product if they can’t afford the super high end, which is where most of the new construction is, as you would expect? Job growth is what’s driving that, and it’s the in-migration. We’re going to worry about the supply of housing, and not having enough, more than overbuilding from that standpoint.

DUNN: I agree that multifamily is super strong, and job growth continues.

COOPER: Industrial is probably the other sector that’s going to be seeing some major investment. It’s getting back to the administration. If they’re going to have more manufacturing jobs — bringing things back to the U.S. — that’s a sector that will see a benefit.

DONA: Apartments and warehouses are the two sectors where we’re active. On the apartment side, our belief is that you’re going to have overbuilding on the high end. In this cycle, almost 90 percent of the new product delivered is at the super high end of the market. It will all lease, but I don’t think it’s going to lease at the desired rents. Meanwhile, you have the good job growth in the broader band of what we would call obtainable rents. That sector is going to continue to perform extremely well. On the warehouse side, it’s interesting. The supply and demand dynamics are going to be about the same in 2017 that they were in 2016, but the capital that wants to buy what is now called “last mile industrial” is massive. You’ll see record prices paid for that product in Dallas this year.

Are there certain areas of the region that you see having the highest potential with multifamily or industrial? The southern part of the county seems to have a big industrial boom. Where do you see that, moving forward?

DUNN: Multifamily housing and new jobs are going to far northern Dallas county. I think one thing that could surprise us a little bit ... is if we have some sort of a rift with Mexico. That’s one of our largest trading partners. That could hurt the industrial segment and surprise us in a negative way. Hopefully, that wouldn’t happen, but it’s possible for a negative outcome for a Trump policy — people are trying to read into everything. Who knows what’s going to happen? But that could surprise the downside. If his policies are as effective as people believe they will be, then you could see hotel construction really continue to outperform because hotels are GDP correlated.

ROWSEY: The multifamily sector, the value-add space, as Tim mentioned, is extremely frothy. A lot of capital is adjacent value-add to multifamily and that will continue. It addresses the affordability issue on higher-end multifamily. You may just ask “Can the demographic that’s attracted to that product afford the high-end product?”

What’s driving the pricing trends in DFW right now?

JORDAN: It’s rent growth. You’re seeing people pay up, and some people paid up in ’15 and ’16, in anticipation of that good, strong job growth. You’re marketing to certain rents in buildings where you’ve got a seven- to 10-year-old lease in an office building, and it’s been marketed maybe up 30 percent from what it was. The rent growth is the biggest driver by far.

DUNN: I would also say monetary policy is a big driver. Monetary policy has been very loose and very pro real estate, maybe to our detriment in the end. But, in some ways, you could argue it’s created a bubble. In confluence with the high volatility regulations in terms of construction, now banks are into bridge lending and those types of things — a lot more capital for the value of apartments and things of that nature.

COOPER: Job growth is supporting all of that. New people are moving into the city from other areas, and the continued growth is the backbone for everything.

DONA: To piggyback on the comment on monetary policy — this is not unique to Dallas, but there’s a starvation for yield. It has a tendency to create a bit of a bubble, whether it’s apartments or warehouses. Whatever the product is, you see people starved for yield who are willing to forget about replacement cost when they buy a product. And that’s going to continue to drive capital flows in Dallas and elsewhere.

ROWSEY: Clearly, employment and population growth are a major driver on the positive side. If you look at population growth in the U.S., it’s about .8 percent. We’ve been at two to three times that. And, if you see a recovery in the energy sector, you could even see greater growth. A lot of investors are looking for demand-driven markets and the Sunbelt Region has attracted the most population and created the most demand. Dallas-Fort Worth has been the leader in that entire realm.

Talk a little bit about Janet Yellen’s recent comments that the Federal Reserve will need to raise rates at an upcoming meeting. Would it affect investment in DFW?

DONA: I hope they do. It would be healthy to have a little more balanced monetary policy. There’s so much demand for real estate right now that a moderate increase in interest rates might not even affect pricing that much. I would expect it. We assume that a 100 basis-point increase and interest rate would cap rates 50 basis points. The reality is, demand for real estate is so great right now, I’m not sure if there would be that much impact. It would be healthy to start going to a more normalized interest rate situation.

JORDAN: Returning to the mean, it’s not like rates have increased so dramatically beyond what would be normal. This is normal. We’re getting back to normal. We haven’t been at a normal state. They’ve been unbelievably low. Domestically and internationally, rates have been phenomenally low. That’s driven a lot of people into real estate for that yield that they can’t find in other places.

DUNN: I would say it a bit differently. I agree that rates need to go up, but I don’t think that will revert to the mean. The mean being Fed funds rated at 5 percent: I don’t think it’s going to go there. I don’t think it’s going to go there, maybe, in our lifetime. I could be wrong, of course. But at the same time, we have very inflationary trends in terms of demographics and other things. It’s not the same as it was back in days of Reagan — a lot of people were saying Reagan passes tax reform, and it caused this boom. But that was on the tails of the baby boom generation entering their peak earning and spending years. Now they’re starting to downsize, and you see that shift. I don’t see our rates moving up materially. I think if they move up to 200, that would be a surprise — and that being not even close to the norm.

ROWSEY: Rising interest rates can affect pricing somewhat, but not necessarily the amount of investment activity. As Tony said, there’s still a lot of appetite for yield. And, over the last two years, a lot of performance and a lot of the impact of rising interest rates has already been priced into the market. There’s been an expectation. We’ve seen forward expectation rates being 100 to 150 — 200 basis points higher than they actually have been. I don’t see it affecting this activity that much. We’ve seen the cap rates spread over the 10-year treasury tighten over the last two quarters. There’s probably still a little of bit of cushion there.

JORDAN: You’ve also seen spreads moderated by mortgages. When the interest rates went up toward the end of the year, you didn’t see spreads moderate much. The early part of this year, spreads have moderated 30 to 40 basis points. You’re offsetting part of the interest rate increase per the spread compression.

Last year, during the capital markets panel, we asked how buyer and seller expectations were matching up. What are you seeing right now?

JORDAN: For retail, they’re not matching up. That would be the one segment where there’s probably the biggest gap. For multifamily, there’s a bit of a gap for the new-build product. People may not be paying quite the price that the developer had hoped for. Industrial is meeting expectations. If the seller is not meeting his expectations, his expectations were crazy.

ROWSEY: There’s a fair amount of equilibrium in expectations between buyers and sellers. Some sectors obviously are better than others. They’re starting to see some pressure especially on land. Land prices are high, and that’s always the accordion for real estate pricing, obviously on the development side.

Overall, the number of buyers has probably shrunk in terms of a property coming to market, but pricing expectations have been pretty much at equilibrium.

DONA: On multifamily, on apartment deals that are $50 million and less, there’s more of a buyer/seller meeting. When you get up into the very large assets where there’s a smaller pool of buyers, there’s been a bit of buyer/seller mismatch. But otherwise, it’s a pretty good equilibrium.

COOPER: When dealing with the good-credit tenant, there’s still plenty of demand and plenty of buyers, which is making it expensive for the buyers with all the competition. Depending on what type of risk they are, it’s impacting buyer/seller match up.

What do you see as the region’s biggest selling points, and on the other side, what roadblocks are out there to getting deals done locally in 2017?

DUNN: It’s already stated, but it’s the pro-business environment. It’s limited government by design, set constitutional limits to government—two years instead of every four years. It’s monetary policy. It’s job growth. It’s because we have a lot of millennials here, too. A lot of millennials are brought to this region. We’ve a fairly young population, relative to most of the nation. These people are attracted to this environment, and the dynamics of this environment, which is also driving the demand for multifamily product and things of that nature, since they can’t afford a home. It’s a nice sweet spot for multifamily as a result of that. ... Regulations are somewhat of an impediment to the banks. They’re slowing them down a little bit. There’s been a pullback in terms of construction, which is probably a positive in some respects. On balance, I don’t see a lot of things holding us back. It’s really more about the unknown things that could happen globally we’re just not seeing right now. It’s the unexpected that you just don’t know. That’s going to get us in the end, or pop the bubble, so to speak — or it could cause a recession. We’ve had a long run. It’s the second-longest run in terms of growth, consistent growth, in U.S. history. It’s definitely time to be a little cautious in terms of what could happen, but maybe the Trump policies will change that image. We’ll see.

JORDAN: You’ve got to add the airports, having DFW and Love Field. Ridership at Love Field has doubled since the lifting of the Wright Amendment. Chicago’s got a similar circumstance, but there aren’t many major cities [with the] robust infrastructure we have relative to air travel. That’s a big piece. And you mentioned the workforce: It’s a well-educated young workforce. That’s a huge positive for DFW. If you think about the magnitude of what’s happened since 2010, we’ve added 732,000 jobs to the Metroplex. Putting that in context, that’s the jobs that exist in Salt Lake City. So you drop Salt Lake City into the Metroplex, and that’s the number of jobs that have been created. It’s phenomenal what’s happening here. We all live here, and you take for granted how dynamic that’s been. It can’t be overstated.

DONA: There’s no place better than Dallas to be if you’re in commercial real estate. Getting to Tim’s comment about a well-educated workforce. Not a short-term concern, but a very long-term concern, is the state of Texas proudly underfunds education. In particular, since so many of our population under the age of 18 are in a low-income environment, we have to figure out how to substantially increase our investment in public education if we want to be as dynamic in 20 years as we’re today.

ROWSEY: This is a business-friendly political environment. We were recently involved in a corporate relocation — a company from California. Going through the entitlement process, the regulatory approval process here took less than 12 months. Their estimate was that it would take 10 years to get similar approvals in California. That’s a big difference, believe me. We’re seeing more and more companies realize that, in moving to different parts of the country, whether it’s the Northeast or the Midwest or the West Coast. Dallas has become a major market for real estate investment. People have finally gotten over the ’80s. There’s not as much volatility in the market. We’re not one of the “Sexy Six” [New York City, Boston, Washington DC, Chicago, Los Angeles, and San Francisco] yet, but I think more and more capital, both domestic and foreign, are coming into this region. On the roadblock side, the concern is whether infrastructure can keep up with population and job growth, whether it’s transportation or other infrastructure. [It’s] going to take an investment in infrastructure, and it has to get out ahead of growth to some extent. We’re behind right now. To get out ahead of growth, that means that you’re going to be to have to make those investments before the tax base is there. You have to anticipate it. Hopefully, we’ll start to see more infrastructure investments in the region.

DUNN: I’ll highlight something as an example: We’re about to close on a deal in California, and it took them 17 years to get the land entitled — literally 17 years.

ROWSEY: It’s like a career.

Let’s talk for a minute about something that’s been in the news a lot in the last year, and that’s the Dallas Police and Fire Pension Fund. Is that affecting investment interest in DFW, and if it is, how does the city overcome it?

JORDAN: We haven’t seen it brought up as a subject from the buy side. To date, it hasn’t seemed to have affected people’s mindsets on when they’re buying. They’re buying for other reasons. That isn’t getting in their way.

COOPER: We haven’t seen any comment on that from investors outside of Dallas. That hasn’t been something that’s come up at all.

DUNN: I would worry about the morale of the police force and what happens to them. They’ve had a lot of issues this last year. But I think the morale of the police force long term is the real issue, both the pay and otherwise. I think that could be a problem if you see crime moving up significantly in Dallas now, because the police are retiring and leaving and quitting and moving to other precincts. We’re bleeding more money into the suburbs. That could be a real problem in the long run but nobody’s mentioned it.

ROWSEY: It’s not a big issue from the investment standpoint. It’s a big issue from the city standpoint that needs to be addressed. We have a reasonably large footprint in the Chicago market, and if it’s not affecting investment in the Chicago market, I don’t think it’s going to affect investment in Dallas. Because our problem is a tiny fraction of the problem they have in Chicago.

What is the state of foreign investment coming into DFW? Maureen mentioned it’s about 10 percent. Do you see that growing? We’ve talked about the uncertainties of policy as far as trade and the other things that would affect it.

DUNN: One concern would be the elimination of EB-5, which is probably driving some of that demand. That’s one aspect of it. I don’t know the numbers on how much is coming from EB-5 versus some other sector. That would be one thing that if that goes away, you could see some of that dry up a little bit. Another factor is the negative interest rates overseas. Negative interest just causes flight of capital. That’s not good for their economies or their environment. It’s a pretty material tax to the poor, but I don’t think it’s good for their economies, and that’s what’s driving a lot of the demand for the United States. We’re relatively better than a lot of other countries, even though we’re very fiscally irresponsible as far as the reserve currency.

DONA: We don’t see foreign capital in the size asset we invest in, but to Paul’s comment earlier, Dallas isn’t the “Sexy Six” yet, but it’s just outside of that. We’re on the radar of international capital. I recently heard there’s almost 7 trillion of sovereign wealth money, and that money is currently 2 to 3 percent in real estate and going to grow. In particular, China is pulling back a little bit now, but the negative interest rate countries — Japan, Germany, are gearing up to try to do more U.S. investment. I think Dallas is going to capture a fair amount of that over the next several years, and I think it will probably be material.

COOPER: It’s gotten expensive [in] the other cities. So, that’s why they’re looking to places like Dallas with the pro-business environment to be investing here. Just on the global macro view, if that’s where there could be uncertainty in the future, depending on how the policies turn out. That would affect everybody, not necessarily just Dallas. But assuming everything stays stable in that perspective, Dallas is going to see more relative investment from foreign capital because they’re recognizing all the benefits of being here from an investment perspective.

JORDAN: Foreign investors tend to want to buy assets of size. And you look at the number of transactions over $100 million and over $200 million: There just aren’t that many in DFW. So the size of and the cost of our real estate is not so exorbitantly expensive to be able to fill those buckets. You don’t see as much foreign investment just because of the size of the projects done here are just not that large.

ROWSEY: There’s a fairly good chance of tax reform under the new administration. And one of the things that has been discussed pretty robustly in Washington is changing some of the tax on foreign investment. That could free up additional investment capital from foreign sources.

Let’s look ahead. What areas of DFW are really ripe for investment right now?

ROWSEY: Pretty much every place right now. From a regional standpoint, the increase in defense spending could be a real positive thing for Fort Worth. The studies I have seen show that it probably is the third-largest beneficiary of increased defense spending. That’s a real positive for Fort Worth. The success of Uptown in Dallas has created an opportunity for other areas to be successful. As prices have risen, you’ve seen a migration of activity to the Knox Henderson area, to the Design District, to the South Side Flats area on Lamar. When you look at it, there’s some real positives for the whole Deep Ellum area — it’s kind of languished for a while — but you have concentration of ownership there. Its location is very attractive. There’s been some infrastructure investment in that area, and I think it could become a really hot area. Hopefully, that [will lead] south from Deep Ellum, which I think would be great for the city.

COOPER: I concur with Deep Ellum and going down to The Cedars area — especially with the train and the population that’s in downtown and Uptown now. [People] could be in The Cedars area and be close to those businesses, without having to deal with coming from the north and the traffic ... We could see some real positives.

DONA: Everything is right for development because the level of job growth and population growth is so spectacular in Dallas-Fort Worth right now. There are many places to invest. You’re going to see a lot of markets emerge. An example is two of our new investments in the area: One is a very high-end apartment next to Stevens Park Golf Course in Oak Cliff. Another is a very nice apartment on the east side of Fort Worth, up on the bluffs overlooking downtown. That area of Fort Worth is not really redeveloped yet. In the next 10 years, with continued growth, you’re going to see that whole area transformed, just like the west side has. There’s a lot of opportunity for anything that’s somewhat in-fill, given the population growth.

DUNN: Dallas’ Trinity Groves hasn’t been mentioned. That’s a big one. And, the State Fair could be interesting if someone could come up with something unique there. I don’t know what it would be. But a mayor that will go and make a big mistake by letting the Dallas Cowboys go to Arlington — that would have been huge for Dallas — but that’s in the past. Just look at what American Airlines [Center] has done, and that’s really created Uptown in a lot of ways. Frisco and Midtown are going to be interesting — what happens to Midtown and that development. It’s very in-filled and has a lot of good traffic connectors. They could do some interesting stuff there. Obviously, Frisco is not a secret, but a $6-billion model.

Is this a time to take risks or to be cautious? What are the main challenges that you’re facing in commercial real estate investing?

DONA: I’m probably like Paul. I’m pretty negative.

JORDAN: That’s why we put you guys at the ends.

DONA: I haven’t recovered from 1990 yet. Times are great, but I don’t think you should make any investments that you don’t want to hold through a recession. I don’t know that there’s a recession any time soon, but I don’t want to do anything that I would be scared to own in a recession right now.

DUNN: We have to take a longer view on [construction]. Another part of it is commercial mortgage-backed securities. So in both areas, we look at it exactly like Tony — [we] just have to get a lot of cushion for understanding the basis: Be very careful, have enough cushion for a downside, and make sure you protect your capital. As a lender, we want participation on the upside and not on the downside. We want to make sure we get our money back. We’re always looking at that. We’re very basis oriented, and we really try to measure our downside risk. We do a lot of hotels. Right now, we’re dealing with a lot of low-leverage hotel lending. We’re very careful about what we go into, and what exit pricing it is. The exit price is double or triple our book value.

JORDAN: If you’re going to invest in real estate, there’s no better place than North Texas to invest. Just the dynamics of North Texas are as good as you can find anywhere in the country. If you have a recession nationally, it’s going to affect North Texas like it will any market. We’re going to fare better than most markets through a recession, so the picture is as bright here as it is anywhere in the country.

ROWSEY: If we go into a recession, we’ve got a bigger safety net with all of the activity that we’ve gotten in the last couple of years ... That actually happened during the last recession as well. There’s a lot of uncertainty out there — politically, financially, overall — in terms of monetary policy. In uncertain times, people tend to become financially more conservative. There’s a tendency today not necessarily to cut back on the level of activity, but to be much more risk averse. We’re seeing people de-risk, de-leverage — we’re doing that — and basically position themselves to ride out the cycle if there’s a downturn. That probably means there will be a little less pricing momentum going forward. People take more of a defensive posture and focus more on the return from cash flow, as opposed to residual. We’re 92 months into a recovery. The long-term average is 60 months, but if you look at the last four recoveries, we’ve averaged about 94 months. We’re getting to the top end of that. People take a more conservative view, but not necessarily a negative view.

JORDAN: If you look at the job growth we were talking about earlier, it’s the diversity of that growth. There’s no one sector driving the economy in DFW. Moody’s ranks it the fourth most-diverse economy in America. And you look at the people who are talking to the Chamber about migrating or moving to Dallas — that’s a very diverse workforce that’s coming and looking at Dallas. The fact that we’re not driven by any single sector: You’ll fare any downturn very well from that standpoint.

What are your overall predictions for the capital market activity next year?

DUNN: Since we invested in commercial mortgaged-backed securities, I guess I’ll go first. We invest in everything but the traditional commercial mortgage-backed securities (CMBS) model. We typically will invest with people that are using the capital market to finance their business, not to arbitrage their business — absolve the risk of somebody else. Most of our investments are around traditional models. That being said, we’ve seen a dramatic decrease in [capital markets] spreads just because there’s no supply because of retention requirements. We’re seeing the CMBS markets shrink pretty dramatically. Back in the summer, there’s $230 billion of CMBS. Last year was $65 billion and thus far into the year, we’re half of what we were last year at the same time. We’re seeing credit radically drop in terms of yield. It’s almost taking us off the playing field. We’re not really interested in buying lots at this point. But last year, it was just the opposite of that because some of the regulations came in and basically eliminated liquidity, depending on the capital markets. Prices have gone down materially, and we saw that as a really good buying opportunity. This year, the capital market you can see spread compression, just because of a lack of supply. And that’s going to filter into rates moving up, as Tim was saying. We see some probabilities shrink as people try to compete on yield, and there’s so much competition and liquidity involved. Those are things that lead to bubbles, and that’s when things snap the opposite way. It’s again time to be cautious. It’s a good time to have a lot of liquidity to capitalize on that, on some of the snapback.

JORDAN: I’m optimistic about where the market is because the fundamentals are so good. It will have continued strong investment in DFW. You’ve got good liquidity across all sectors, other than maybe the construction market. I think we’re going to be at a good, steady state for investment in DFW.

ROWSEY: Things are going to be about the same as they were last year, absent some black swan event. If the political environment changes its regulatory tax policy, it might create a little bit of tailwind. That might be slightly offset by uncertainty, and maybe some moderating real estate fundamentals, although I agree they’re still positive.

COOPER: It’s a positive outlook for 2017. There’s still interest in investing in Dallas. And so for this year, pending some big huge event, I don’t see that changing. It’s still strong.

DUNN: I think Dallas-Fort Worth is on fire ... We will weather a recession much better than everybody else.

DONA: The only thing I would add to Tim’s comment about a pullback on construction lending: If you’re an owner, that’s fabulous. I hope that we do see a slight contraction in construction development financing because that’s going to help keep us in balance. We’re very bullish on Dallas.

Jim, you mentioned the long view. How far ahead are you all looking in the big picture?

DUNN: Well, the average life of every construction deal we do is five-years — it’s a three-year, with a two-year or one-year extension. Everything we look at is pretty long, and we think we’ll be holding something during the recession. We always look at it that way. We’ll always weather the storm. I’m going to put my money in it. So we’re very cautious about what we enter, and what we invest in for that reason. And basis is always kind of a first thing — fundamentals. We always go to sponsorship last, whereas banks typically go to sponsorship first. We’re OK with a low down. We don’t want to own, but we know that sponsorship is great.

ROWSEY: Visibility in the capital markets beyond five years is very murky. It gets murkier every day that you look forward. We probably try to convince ourselves that we look five years forward. Beyond that it gets very difficult. We do look longer term in anticipating demographic trends, social trends in terms of where you want to be. But I think beyond five years gets really difficult.

JORDAN: That will be good for the next two weeks. That’s as far out as I can see. We’ve been on a rolling two-week program.

JOINING IN

Duane Dankesreiter, Dallas Regional Chamber Senior Vice President of Research and Inno-vation, and Linda McMahon, TREC President and CEO, joined the conversation, contributing questions from their perspectives.

DUANE DANKESREITER: Are we competing from an investment standpoint more now against the “Sexy Six,” or who are the other markets that we compete against?

ROWSEY: We do compete against the “Sexy Six” markets more than we ever have. If you look over the last 10 years, you have seen more volatility in those markets than you have here. We do compete with them. In terms of direct competition, in terms of the capitals versus the buyers that we see in this market, they tend to be focused more on what I call “command-driven” or Sunbelt markets. Obviously Dallas, Austin, Houston, Phoenix, Atlanta, Charlotte, maybe some of the D.C. area.

DONA: The class of investor that looks at Dallas is typically going to be someone whose investment thesis believes in growth and employment. If that’s your focus, then the cities Paul mentions are the ones that are your competition for capital.

JORDAN: But as you compare, look at our job growth since 2010 compared to those cities: We have a much better fundamental picture than Atlanta. Atlanta has been good, but we’re outpacing them dramatically.

DANKESREITER: We had 113,000 new jobs last year. That’s second to New York. That’s kind of where I was leading with the question.

JORDAN: We actually exceeded New York in 2016. We exceeded New York and LA. So we were No. 1 nationally in job growth at the end of

2016.

DANKESREITER: You mentioned that investment might be coming from negative-rate countries. What countries should we be thinking about in terms of serving as their North American headquarters? From the Chamber’s perspective, we work international markets looking for corporate relocations.

DONA: The big capital flows — and Paul might know better than me — but Canada is big. Norway is big. Everybody thinks Germany is going to become big again. China is big, but everybody expects them to reduce. Who would you add to that?

JORDAN: Korea.

ROWSEY: You will see some capital.

JORDAN: Some of the relocations like Toyota really put Dallas on the map because they’re making 50-year decisions. It’s a generational decision, and that speaks volumes nationally and internationally when they come to Dallas. That’s a huge calling card.

LINDA MCMAHON: I’ve often said that what happens in the economy here is going to be dictated by decisions from elsewhere, like big New York banks. I have some experience there. Where do you think the center of influence is, in terms of that as an external investment, and how that dictates investing in this market? Is it still the same dynamics as it always has been?

JORDAN: I would say the investment into DFW is a pretty diverse investor base. It’s not driven by New York or the coast in that regard. It’s a pretty broad base of investment here.

MCMAHON: I was surprised, frankly, that the pension fund crisis hasn’t had an impact on investor opinion. What about the bond downgrades that we have experienced and could potentially experience as a result? Does that have an impact?

ROWSEY: I haven’t seen any impact this far.

DUNN: We’ve a municipal group — I asked them. They were saying with Dallas bonds, I have no idea, but I would say that would obviously impact the municipal market.

DONA: I think there’s an assumption that it’s going to get worked out, and I don’t think it will impact Dallas-Fort Worth. But if you wanted to invest in Dallas, and if the pension crisis doesn’t get worked out, you might do Frisco instead of Uptown. I don’t know. At some point they’ve got to figure it out, because otherwise you have to assume if you were making an investment in Dallas, you can’t predict what your tax rate is going to be, for example, because you don’t know how the issue is going to get resolved. It’s a very big deal, but I agree that I don’t think anybody has seen any impact to date.

ROWSEY: I would add that there are over 3,000 counties in the United States. Seventeen percent of those 3,000 counties experienced positive population growth last year, 17 percent. And it’s not hard to figure out where those counties are. Growth can solve a lot of problems. Capital can flow. It’s very portable. It can go wherever it wants to go, and you have to look at the competitive set. You take those 17 counties that are growing and you look at their physical condition, and then you compare Dallas to them. We look pretty darn good, even though we have our issues. And the other thing I agree with 100 percent is, there’s a can-do, positive attitude in this community. If there’s a problem, there’s an expectation that problem will get addressed and solved. Hopefully, that will continue to be true. That’s not true in a lot of places.